(all $ are Canadian unless otherwise specified)
I first wrote up GFL nearly 2 years ago. To recap: garbage collection and disposal is one of the few businesses that you can be sure will still be around in 20 years. Its recurring necessity gives rise to predictable and stable cash flows. Residential collections are locked in under 3 to 10 year exclusive agreements that are very hard to lose, as city officials don’t want to risk pissing off voters by re-bidding contracts, a lengthy and onerous process that could disrupt garbage pickup. Commercial (retailers, restaurants) and Industrial (manufacturers, contractors) customers are secured under 3-5 year contracts that are tough to profitably steal away from incumbents who have established route density (the more customers a collector has along its route, the more cost effectively it can serve an incremental customer). They will accept hike prices without much resistance because trash collection is a necessary but small enough component of their overall operating costs. Backed by resilient cash flows, GFL can expand into new markets and infill existing ones through levered M&A – paying 8x-11x for platform deals and 7x-8x for rollups (for the latter, more like 5x-6x after cost and revenue synergies) – converting high-single digit ROICs into low double-digit ROEs.
I harbored two reservations about GFL at the time. First, they carried a relatively high debt load and a quarter of it floated at a time when rates were near generational lows. Second, I worried that operational aspects of the business may have slipped through the cracks as the company pursued aggressive debt-fueled M&A. GFL had spent more on acquisitions in the previous 3 years than WM despite being 20% the latter’s size, paying what some competitors believe were rich valuations to establish footholds in new territories. From a starting point of 4 trucks and $250k in seed capital, GFL’s founder and CEO, Patrick Dovigi, built the 4th largest waste management company in North America in just 15 years on the back of ~200 acquisitions, including several chunky ones – Waste Industries ($3.7bn), WCA ($US 1.2bn), and divested assets from WM’s purchase of Advanced Disposal ($US 835mn).